The banks are still under pressure to change their charges
UK banks may make it easier for customers to opt out of using unauthorised overdrafts, the Office of Fair Trading (OFT) says.
If people did opt out, it would mean seeing payments blocked as the price for avoiding high overdraft fees.
Last year the Supreme Court threw out a challenge to the way banks charge fees.
But the government and the OFT have still been putting pressure on the banks to change their charges, which earn them billions of pounds each year.
The OFT says it will call for changes to the law if overdrawn customers are not treated better by the banks within the next two years.
"We believe that the commitments agreed by the industry today, along with changes by individual banks already made or expected in the next two years, should lead to a market that works better for consumers," said John Fingleton, OFT chief executive.
"We will continue to closely monitor the banks and will reconsider the need for action, including legislation, if they fail to deliver these changes."
After three months of behind-the-scenes negotiations, the banks have agreed to give customers the option of not being granted an overdraft automatically when they fall into the red.
The FSA said it could not give any details of the banks' emerging proposals for reasons of "commercial confidentiality".
But it said banks had agreed to devise ways for customers to monitor the state of their accounts more closely, to avoid going into the red in the first place.
And they have agreed "better treatment" for those who do go overdrawn and then find themselves in financial difficulty.
One of the UK's biggest banks, HSBC announced the launch of a new bank account from 26 April to meet the OFT's requirements.
"The new account - to be known as HSBC Bank Account Pay Monthly - features a strict overdraft limit that cannot be exceeded unless the bank has formally agreed a higher limit beforehand," HSBC said.
"The account has a monthly price of £15 and because the overdraft limit cannot be exceeded, it carries no unauthorised overdraft charges and no returned item fees.
"The strict limit on overdrafts that is a central feature of Bank Account Pay Monthly could mean that customers experience more bounced cheques or unpaid direct debits than they are used to and their credit rating could be affected," it warned.
Overdraft fees are one of the biggest sources of income for High Street banks and in 2006 generated £2.6bn for them.
After two-and-a-half years of litigation, the banks won their test case with the OFT when the Supreme Court ruled in December that the OFT did not have the legal powers necessary to challenge the right of banks to charge overdraft fees as they saw fit.
Consumer groups who have been campaigning against "unfair" overdraft fees criticised the OFT's latest pronouncement.
"[We] are very surprised and extremely disappointed at the OFT's press release on bank charges which offers consumers no tangible protection against the imposition of unfair and extortionate charges," said consumer campaign group Legal Beagles.
"The Office of Fair Trading's report, following nearly three years of investigation into the personal current account market in the UK, is extremely weak and does nothing to improve confidence in the regulator or the banks."
Marc Gander of the Consumer Action Group said the OFT had "nothing to cheer about or to congratulate itself about".
"Despite its powers and its influence, the OFT has achieved very little," he said.
"It has been defeated on the test case charges issue because it allowed itself to be corralled into dealing with a very narrow point of law and despite a very clear signal from the Supreme Court that there were another more realistic routes to make a challenge on behalf of bank customers, it has declined to do so."
The OFT says that its pressure and greater competition in the market have already reduced the average level of fees charged when customers go into the red without prior agreement.
It says fees for bouncing a cheque or other payment have fallen from £34 in 2007 to about £17 now.
Likewise, fees for actually processing a payment for someone on the red without prior agreement have also fallen, from about £30 in 2007 to £22 now.
The OFT said: "Over the next two years, the OFT will monitor developments in the market, in particular the options available for customers who do not want access to unarranged overdraft facilities, choice around charging structures, the level of unarranged overdraft charges, and the treatment of customers who find themselves in financial difficulty."
Martin Lewis of Moneysavingexpert.com said: "This is a flaccid document and a complete waste of a chance to improve things for consumers.
"After three years, all it's managed to do is set up yet another inquiry into best practice and told us it will monitor the banks for another two years, then maybe take action," he added.